Misplaced millions

Subsidies in the fossil fuel industry

It’s hard to recall a time when government finances the world over were in a worse mess than they are today. Greece, Portugal and other European nations teeter on the brink of default. The US is running deficits so large the numbers defy imagination.

Canadian finances are nowhere near balanced either. This year, our federal government is spending over $30 billion more than it is collecting in revenues. That equals about $1000 every second of the year.

So it’s not surprising that governments everywhere are looking for ways to trim costs and raise revenues. It is surprising, however, to see that one of Canada’s richest industries has been largely spared: the fossil fuel industry is still receiving $1.4 billion a year in subsidies – a gift paid for by you and me.

A rich handout

It’s hard to imagine that the fossil fuel industry needs a handout. High oil prices and record demand are adding billions to the bottom lines of corporations like Imperial Oil, Suncor, and Shell. Just last week, Shell announced global third quarter profits of $7 billion, double the profits of the same period last year.

Yet those same companies and dozens of others are happily benefitting from the generosity of Canadian taxpayers, to the tune of almost $4 million every day.

If that sounds puzzlingly out of touch with fiscal reality, the global picture is even more incredulous. The International Energy Agency, a respected advisory body with 28 member nations, estimates that global fossil fuel industry subsidies totalled $500 billion in 2010. To put that in perspective, that amount is 70 times the annual budget of the New Brunswick government.

Three main types of subsidies

So what does a fossil fuel subsidy look like? There are three broad types.

1. direct handouts: when governments provide money for research and development or to help specific projects. For example, the federal government is a significant funding partner in the Petroleum Technology and Research Centre in Regina, which conducts research on enhanced oil recovery and carbon capture and storage.

2. program expenditures: money spent through government programs specifically related to the fossil fuel industry.

3. tax and royalty breaks: most fossil fuel subsidies are in the form of special deductions and exemptions that allow the fossil fuel industry to pay less taxes and royalties. For example, the federal Capital Exploration Expense allows companies (or their investors) to deduct a generous 100% of their exploration expenses from their income tax each year. It’s clearly a program of great interest and benefit to wealthier investors. The Canadian Development Expense allows companies to deduct 30% of all development expenses from their income tax. Operations in the Alberta tarsands have a special depreciation rate that is higher than the rate for the rest of the oil and gas industry. That means they can deduct more depreciation from their income and pay less tax.

Many industries benefit from subsidies, but the fossil fuel industry sure seems to get a lot of them.

A tilted playing field

If handouts for one of the country’s richest industries seem out of touch at a time when governments desperately need money, there’s yet another downside to fossil fuel subsidies: they make fossil fuels artificially cheap. At first read, that might sound like an advantage, but it’s not. Low prices are a disincentive to conservation and efficiency: they cause us to use and waste more, and generate more greenhouse gas emissions. They also discourage much-needed investments in the renewable energy we need to get us off of our fossil fuel addiction before we cook our planet. As long as wind and solar energy are more expensive than subsidized fossil fuels, who wouldn’t choose the latter?

Time for a fix

The 2011 federal budget took some baby steps by cancelling about 1% of the subsidies. But isn’t it high time the other 99% got a closer look? Surely, priorities such as health care, education, renewable energy, the environment or deficit reduction deserve $1.4 billion a year much more than the fossil fuel industry.